Who said tax is boring?

Archive for the month “November, 2012”

It is a tribute to the emotional power of poetry that, when I think of “Four Weddings and a Funeral”, I remember the single funeral rather than the multiple weddings. “He was my North, my South, my East and West” – Matthew’s rendition of WH Auden’s Funeral Blues as he eulogized Gareth, lent pathos to one of the most memorable scenes of British cinema.

Dame Judi Dench, doyenne of the British stage, was somewhat less convincing quoting Tennyson towards the end of her inquisition at the hands of a Parliamentary Committee in the latest James Bond movie: “That which we are, we are”. But then, in fairness, Bond movies are never really remembered for their dialogue (this one even has the barmaid, at the start of a shot, shaking the vodka martini so Bond doesn’t have to state the obvious). With names like M, Q and 007, far from poetic, the whole experience is not even prosaic but, rather, algebraic.

On November 12th one of those Parliamentary Committees was in action again (this time for real) and its three hour session did not fall short of Skyfall for entertainment value (and, make no mistake, I loved Skyfall).

The Public Accounts Committee invited representatives of Starbucks, Amazon and Google to assist them in their understanding of the tax paid by multinationals in Britain – or, to be more precise, the lack of it.

“Don’t worry. I never used to pay any tax and the British forgave me”

Amazon and Google were, sensibly, represented by senior Brits who could, at least, bridge the culture gap. Starbucks, evidently thinking that an invitation to appear before the legislature meant tea and cucumber sandwiches with the Queen, sent their global CFO. Poor guy.

The meeting, expertly chaired by Lady Margaret Hodge, an MP in her late sixties who (WARNING: SPOILER ALERT) would have been a far better replacement for M than Lord Voldemort, started with the usual British niceties – smilingly apologising for the poor layout of the room and thanking the three gentlemen for agreeing to come. As I watched the parliamentary broadcast and the three stooges sitting side by side, all I could think of was the upward crawl at the start of a roller-coaster ride with one kid in the cart who has never done this before. You want to warn him of what is coming next but you are so scared yourself that you can’t.

In age-old British tradition, Lady Hodge “suggested” that they start with specific questions to each company and then move to general issues; a bit like “suggesting” to the condemned man that they start the hanging. And – surprise, surprise – she started with the American. Needless to say, it was all downhill and hairpin bends from there.

Hapless Mr Bean was not going to have a chance justifying losses in 14 out of the last 15 years when, a year after they made their only profit (2006) of £6 million on a £4 billion turnover, the UK CEO was promoted to a senior role in the US HQ due to his great performance. “We are not accusing you of being illegal, we are accusing you of being immoral.” ” You are either running the business very badly or there is some sort of fiddle going on”. Apart from trying to invoke the lunacy of accounting differences between the US and Britain, about the best the CFO could come up with was “profitability challenges” which is a beautiful term right up there with “transparent wall technician” as a euphemism for window cleaner.

Google and Amazon, protected to varying degrees by the – impossible to fathom – internet aspects of their business and the fact that they were British and therefore knew how to handle sarcasm, fared somewhat better. However, when the Google CEO asked Lady Hodge to clarify that a series of quotes of senior politicians expressing disgust at the lack of tax paid were not aimed specifically at those around the table, she replied that, no, they were indeed aimed directly at them.

Meanwhile, a widespread populist movement to boycott Starbucks has got underway with some branches requiring police protection. An article in the Guardian, a centre-left quality newspaper, by the improbably named Jemima Kiss put it all down to a “practice known as Transfer Pricing” which sounds like some shady underworld trick. Are Transfer Pricing practitioners now to be sought out and lynched from the nearest palm tree?

The whole thing is a load of populist codswallop. Trying to pin legal and transparent transfer pricing practices (and in that, Ms Kiss was spot-on with the root of the problem) on the question of morality defies belief. It is not that morality has no place in the tax world – it can be strongly argued that the technically legitimate planning of individuals and companies to avoid tax in their countries of residence, where they and their fellow residents and citizens benefit from public expenditure, has elements of morality and conscience. But when it comes to international taxation, it simply has to be down to the legislatures of individual countries and international organizations like the OECD and UN to establish tax rules that ensure fairness as defined by them.

How is the Tax Director of a multinational supposed to decide his or her transfer pricing policy on the basis of morality? After completing an analysis of assets, functions and risks, even if he would send each Transfer Pricing Study to the local Priest, Rabbi, Imam or Witch Doctor for a blessing – who says that the moral authorities of the other countries affected would not take a different view. And what about wonky-minded States who could play their Joker and roll out Nietzsche’s Übermensch to justify steamrolling the rest?

In 2010 the OECD announced the commencement of a project on the transfer pricing aspects of intangibles. A scoping paper was published on the OECD website for public comment. In the interim, three public consultations have been held with interested parties. The writing on the wall suggests that R&D cost-plus operations in the future will require a much higher “plus” justifying the enormous human input and, also, that the parking of IP on desert islands will only be acceptable if a significant number of the IP company’s employees on said island are first sent to Harvard or Oxford to study for an MBA or PhD. Furthermore, individual countries need to ramp up their CFC legislation to make sure they are catching the right foreign income even when, as is the the case with the vast majority of OECD countries, they have adopted a system of territorial taxation.

Pure Poetry

Poetry may not be Skyfall’s strongpoint but there is one scene that, for people of a particular generation (mine), had all the immediate emotional force of a great poem (WARNING: SPOILER ALERT). Fleeing certain death with the aged M, Bond swaps her state-of-the-art Jaguar for the legendary Aston Martin DB5 used in Goldfinger almost 50 years ago. As aerial shots showed the car wending its way along country roads to the Bond ancestral home, for a brief moment sitting in the darkened cinema I found myself watching the movie through the eyes of a youth (me) dreaming of an exotic Bond-like future. The rest (of course) is boring beancounting history. But I wonder what my two teenage sons sitting next to me were thinking?

Flying Cattle Class tends to bring out the worst in me. After being herded through check-in, security and boarding I make a beeline for my aisle seat , generally having boarded early enough to lay claim to the corner of an overhead baggage compartment that is actually over my head. Flying Cattle Class is all about marking territory. On a train or bus I am willing to stand up for elderly passengers, to contort my body into wondrous shapes while traveling in the rush hour or sqeeze myself into the smallest available seating space. Not on a plane.

Grabbing my newspaper I try to read but am immediately distracted by the line of passengers streaming through the plane. Gradually the seats start to fill. I stand for a twenty something male in sweatshirt, jeans and running shoes who takes his place by the window. Looking at the advancing hordes I start to wonder – nay, fear – who might take the dreaded middle seat. A woman heads towards me with a screaming baby in her arms. I start to pray. She passes by – her child’s foot swinging into my face. They are followed by a middle-aged man talking angrily over his shoulder to one of the cabin crew. I silently promise that I will give more charity if only he does not sit next to me. He too passes in peace. The passengers all find their seats and, although the plane looks very full- it seems like the place next to me has been left vacant. I mentally genuflect to my beneficent Creator who has singled me out for this good fortune.

Then it all starts to unravel. Finally enjoying my newspaper, out of the corner of my eye I detect movement. I look down the aisle. Oh, for Heaven’s sake, NO! I see the gates of Hell open up before me. Just boarded and bumping his way along the cabin is a last stray traveler, a tsunami, his vital statistics vertically and horizontally identical. The personification of a Westinghouse double-door fridge. Like an ostrich I bury my head in the Business Section and hope beyond all hope that he will carry on past me. But it is not to be. I unbuckle my seat belt, move to the aisle and watch as he squeezes himself between the rows and shoe-horns himself into his seat. With his body bubbling over into my territory, I am forced to spend the entire trip with my shoulder and right side jutting into the aisle where they are incessantly bashed, knocked and jarred.

The Danish leader’s father-in-law kept free-market Thatcher in power for years. Neil Kinnock was leader of the Labour opposition

Air travel suffered a serious blow from an unlikely source last week when Denmark, the first country to wheel out the idea, cancelled its Fat Tax after only a year on the statute books. The law had imposed a tax on foods containing more than a certain amount of saturated fats and hit meat, processed foods and dairy products – predominantly butter. Applying a tax on butter in Denmark, the home of Lurpak, took enormous political courage. With a word in the language that roughly translates to Toothbutter (butter spread so thickly that when you bite it leaves toothmarks), it was akin to a special tax on Guinness in Ireland , snails in France or anything big and unhealthy in the US. The reason it is being abolished is not, however, because of the infringement of traditional Danish values but rather, prosaically, because it is simply costing jobs and driving Danes to cross the German border to buy their butter there.

This is a genuine disappointment to those worldwide who advocate an aptly named Pigovian tax to improve the health of society, thus enhancing the quality of life and lowering national health costs. Currently, the world is left with a tax on soda drinks and a proposal to tax palm oil in France along with a tax in Hungary (there might be one or two others lurking unobtrusively). Beyond the scope of taxation, New York Mayor Michael Bloomberg has been a crusader in preventing the use of trans fats in his city as well as pushing through the , soon to be instituted, ban on sale of mega-sized cups of sugary drinks.

Whether fortunate or unfortunate (depending on how you view restrictions on individual liberty even when for the good of the individual or society as a whole) it is usually economics, and particularly, taxation that ultimately bury most of these schemes along with many of the people they were designed to protect.

When the US introduced Prohibition in 1920 it was an, albeit overzealous, attempt at improving morals and health in American society. By the time the 21st Amendment to the Constitution had cancelled out the 18th in 1933, the arguments were still largely moral: prohibition had encouraged organized crime on a massive scale rather than prevent it; the ban was a fundamental attack on individual liberties.

While these noble arguments were undoubtedly valid, the principal underlying factor in the whole affair was taxation. Until the US introduced a Federal Income Tax in 1914 a third of federal tax revenue came from tax on liquor. With the introduction of the Income Tax the importance of that tax waned and by 1919 the proponents of temperance in Congress were in a position to give it up. Things were fine for a number of years until the Great Depression started to kick in. Income Tax Revenue went down and the newly elected FDR needed funding for his New Deal. Welcome back liquor and liquor taxes.

Obesity will be on a roll if this guy is the next President of the US

In a diary entry in 1962 British Prime Minister Harold Macmillan wrote: “The doctors have come out with a tremendous report on the dangers of smoking—esp cigarettes. This puts us in rather a fix. For how are we to get £800m indirect revenue from any other source?”. The marginalization of smoking has been a long and painful process that is still not complete 50 years later.

It does appear that the only sustainable method to curb vice, be it obesity, smoking, alcoholism or I forget what else, is public education. In the field of food, calorie labeling laws (which are catching on around the world) are an enormous step forward. The strong wording and horror pictures stuck on cigarette packets are happily turning diehard (and they likely, will) smokers into freakshows. That leaves alcohol (and what was that other thing?). Dean Martin once famously said that “You’re not drunk if you can lie on the floor without holding on”. I’ll drink to that!

Laurence Spiegel was my first political hero. Never heard of him? Don’t worry – nor had Google the last time I checked. The one and only time I worked on the campaign team for a British General Election it was for Laurence Spiegel . That was an important election for two reasons: despite polls showing a clear advantage to the incumbent Labour Government, the Tories won an overall majority; and the voting age was lowered from 21 to 18 on the grounds that if you were old enough to die for your country, you were old enough to choose the idiots that got you killed. None of this affected me. Laurence Spiegel was the no-hope third-party Liberal candidate for Hendon South who I don’t think even bothered taking the day off work (I didn’t see him at Campaign HQ) and, in 1970, I wasn’t old enough to gain admittance to a cinema to see a war film let alone serve my Queen and country.

I have been following political campaigns ever since and the latest American circus was no exception. But it was too drawn out. There is a bridge in Scotland, the Forth, that is so long that, it is said, when they finish painting it they start again at the other end. In America, it used to be that campaigning for the Presidency started 4 years before polling day ie the day after the previous one. Watching New Jersey Republican Governor Chris Christie cozying up to Barack Obama in the aftermath of Storm Sandy a week before the election, I could not help feeling that, in a piece of brilliantly cynical political manoeuvering, the world might well be looking at Obama’s successor in the White House.

Election night was a major disappointment. That statement is clearly true for the 48% of voters who picked Romney and did not, like so many of their countryment, exercise their constitutional right to stay home welded to a sofa watching a ball game while trying to break records for calorie consumption. It was also a disappointment for me – and I, disenfranchised by accident of birth, actually wanted Obama to win (or, to be more precise, wanted the Republicans to lose). With the advantage of being 7 hours ahead of New York (some would say 7 light years), I was up with the lark to catch the phut of election night. What a yawn.

Within seconds of Obama hitting 270 electoral college votes and hence guaranteeing a renewal of his Washington lease, what were the pundits talking about? Was it: what will Obama do about the future of world peace ? Was it: what will he do to make America great again? Was it: what is the future for social welfare ? No, sir. In fact, they were talking about tax. TAX! A subject normally reserved for discussion behind closed doors between consenting adults, was the first thing on the lips of the pros. And “reforming our tax code” even made it into Obama’s victory speech in Chicago (which sounded more like the candidate had beaten himself than Mitt Romney).

Fiscal Cliff? Who’s that?

If you have never heard of the Fiscal Cliff, I suggest you climb right back into that little boat in which you have been drifting without food or water for the last 9 months and enjoy the night sky. As everyone knows, the Fiscal Cliff was Ben Bernanke’s term for the higher taxes and lower government spending that will kick in next January 1st if somebody does not kick Congress’s ass (“bottom” in the Queen’s English) first.

The Fiscal Cliff is, in fact, the unfortunate coincidence of a number of economic legislative events coming together to cause an unmitigated disaster: the end of last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers); the end of certain tax breaks for businesses; shifts in the alternative minimum tax;, the end of the Bush tax cuts; and the beginning of taxes related to President Obama’s health care law. At the same time, spending cuts previously agreed upon will begin to go into effect. If nothing is done, some experts are predicting a cataclysmic effect on GDP and unemployment.

The question you HAVE to ask yourself is “How did the world’s leading nation get into this mess in the first place?” You couldn’t make it up.

The Bush tax cuts (the famous bits are the lower tax rates on dividends and capital gains) could not be pushed through the front door of Congress back in 2001 and 2003 so they used something called the reconciliation process that allowed them to be imposed temporarily until the end of 2010. By 2010 the House of Representatives was resembling the battlefield at Gettysburg, and Congress extended them for 2 years. As politics go, that is kids’ stuff.

Four more years!

In the summer of 2011 the sparks were really flying. Congress needed to raise legal debt ceilings for the federal government, otherwise the US was going to default on its Sovereign Debt. The Republican controlled House of Representatives was not playing. At the eleventh hour, a compromise was reached whereby, default was avoided and a Bipartisan Committee was established to produce a plan to reduce the deficit over 10 years by $1.2 trillion by late November. There was a sting in the tail that either arose from a genuine desire to get things sorted out or the irrational hatred between the two sides of the House . The House decided that, if the Committee could not reach a conclusion, automatic, and horrendous, cuts would start to kick in 2013. The Committee, its members too busy scratching each other’s eyes out, didn’t make it.

All that remains for us to do now is to sit back and enjoy the fireworks coming out of the lame-duck Congress. Presumably a solution will be reached at midnight on December 31 (or, with retroactive effect, on January 1). In American politics, after a massive buildup, most things end in a Phut rather than a Bang.

My trip to New York cancelled last week courtesy of Superstorm Sandy, I decided to take advantage of the hour before anyone realized my calendar was empty to clear my desk. Forgetting the utterly ignored disposable cup of coffee nestling under a sheet of foolscap, I watched in helpless horror as it tipped drunkenly on its side and lazily cast forth its contents over my diary and neighbouring assorted papers. My barely legible handwriting disappeared as the ink, dissolving into the coffee, was dispersed across the open page. Taking a leaf out of the book of the intrepid New Yorkers, by midday I had a spanking new diary and only the merest hint of brown on numerous documents newly piled at the edge of the desk.

The experience took me back 40 years to the summer of 1972 when we were just finishing 8th Grade (in England it was called the 3rd Form which was a bit confusing since we had already had one of those several years earlier). Our Form Master was Severus Snape minus the charm with whom one messed at one’s peril. Of course, as healthily idiotic teenage grunts we messed at our peril – but we all knew our limits. All of us, that is, excluding one. There is one in every class. A totally incorrigible youth with no academic aspirations who is programmed to kick back at all cost against authority. Civilly disobedient – Mahatma Gandhi without a cause. Anarchic without knowing the meaning of the word. Angry young man who wasn’t even angry. If we were told to write the address on our report envelopes in the centre, he wrote it in the top left-hand corner. If we were told to sit down, he stood up. Told to write in pencil, he wrote in ink. You get the picture.

We “knew” our limits

In those days part of the daily ritual was the redundant task of calling the register to corroborate the evident fact that, while so-and-so’s desk was clearly empty, he (we were all He’s) was not hiding somewhere else in the room. Each morning the dreaded Commandant would labour through the 31 names and mark squares on that term’s page with an alternating diagonal pencil-mark producing, over time, a herring-bone effect that was quite aesthetic. Trusting in his absolute power over us, the register was left in his unlocked desk – a Holy Ark that we assumed, if touched, meant instant death.

Then came that fateful morning when our revered leader marched to his desk, removed the register, opened it, fell totally silent, shook with rage and then sat down with his head buried in his hands. Carnage. Somebody (guess who) had poured an entire bottle of Parker Quink over the sacred tome. I don’t remember precisely what happened next but, despite the temptation to embellish the story, I am pretty sure there was no blood and there was definitely no ambulance.

Why am I writing all this? Because the European Union appears these days increasingly like a class of juveniles. And no prizes for guessing the incorrigible country. They were at it again last week.

Last Sunday, the editor of an investigative magazine published a list of over 2000 names of account holders in the Geneva branch of HSBC bank and was promptly arrested for breaching privacy laws. What is more, in a show of absolute legal efficiency, he was brought to trial on Thursday and, equally promptly, acquitted of the charges against him.

This all sounds quite impressive, if a waste of taxpayers money, other than for one thing – all the actors in this little play were Greek. The list, transferred to the Greek Government two years ago by the then French Finance Minister and now Head of the IMF, ostensibly pointed to wealthy Greeks who may be running a sideline in tax evasion. Somebody (the hot potato is now passing between former government ministers) stuck it in a drawer and “forgot” about it. Meanwhile, as I noted on this blog back in February there are (or, at least, were) over 165,000 (one hundred and sixty-five thousand) cases awaiting trial in the Greek court system. But they still managed to get this guy up in front of the Beak within 4 days.

What privacy?

I am not a lawyer and I do not know how heinous it is to breach someone’s privacy when it is in the public interest (if I am not mistaken Woodward and Bernstein did something similar 40 years ago that rather inconveniently brought down the President of the United States – and nobody tried to put them in the Electric Chair). However, even I know that there is something absolutely heinous with the government of a country that is struggling on the ropes with its budget deficit, not pursuing tax evaders. The fact that this case was taken to trial so fast is not heinous – it is just a sign of how morally bankrupt and obviously beyond the pale Greece is. I had goose pimples when the current Greek Front Man, Antonis Samaras was praised by Angela Merkel in Berlin. I know that a Greek exit from the Euro would not be simple for the creditor nations and that fact is heavily influencing Germany’s approach. But sometimes the school principal has to realise that it is not enough to make the errant youth write a thousand times “I must not tell lies in class” or “I must keep my promises”. If he proves himself totally incorrigible he needs to be expelled.

The Greeks like to keep telling us that they are the cradle of modern civilization and also the inspiration for the world’s greatest sporting event – the Olympics. Agreed. And what is the greatest problem facing competitive sport in the 21st century? Doping. Greek governments have been “enhancing” their statistics and breaking their promises, rather than records, for years.

It is clearly time to expel Greece from the Eurozone and disqualify it, for a period of several years, from the benefits of EU membership.